Question: How is the legal profession responding to the challenges of the recession? Answer: Alternative billing practices
Has the recent economic downturn affected the way firms bill? Are clients’ expectations of law firms changing? Or are current billing practices outdated? These are just some of the questions the legal profession is forced to consider and answer due to the recent recession and the reality of balancing a firm’s budget when faced with reduced profitability. In a 2009 Wall Street Journal (“WSJ”) article titled, “Billable Hour Under Attack—In Recession, Companies Push Law Firms for Flat-Fee Contracts,” it is apparent that a shift in billing practices has taken place and it is not temporary. Companies are abandoning the hourly rate billing system, which critics claim offers the opportunity to rack up a bigger bill, in favor of flat fee contracts. One survey quoted in the WSJ article maintained an increase of more than 50 percent in 2009 for corporate spending on alternatives to the traditional hourly rate billing practice. This shift affects all attorneys and areas of practice as billing is a universal issue.
Traditionally, the professional standard has been to bill clients at an hourly rate. The billable hour has been a staple of firm life. However, other payment options include flat fees, retainers or contingent fees.
Traditional hourly rate—An attorney is paid an agreed upon hourly rate for all work done and all hours expended on a client’s case until the matter is resolved. The hourly rate does not distinguish between different tasks or the substance of the work performed; it is uniform for the most part and, therefore can add up very quickly.
Flat fee contracts—The flat fee contract is an alternative to hourly billing where the client can pay a flat fee at the inception of the litigation and the firm agrees to work toward the desired result efficiently for no additional fees regardless of how much time the lawyer spends on the case.
Retainer—A fee paid up front before legal representation commences. In some cases, a retainer is a non-refundable fee paid for the privilege of retaining the lawyer, especially if it is a high profile lawyer or firm. In other instances, the remainder of a retainer fund could be refundable to the client at the conclusion of the case.
Contingency fee—An arrangement where an attorney is paid a portion (usually a percentage) of any recovery on a legal matter he/she handles. In most contingency fee arrangements, the client does not pay anything to the attorney unless there is a recovery.
Of course, some attorneys and clients may agree to an arrangement which combines one or more of the above-listed billing practices. For example, an attorney may agree to be paid at a reduced hourly rate with the understanding that an additional contingency fee (or a higher percentage) will be paid upon recovery.
How has the recent economic downturn affected the way firms bill?
In almost every industry, employers are being forced to reduce their workforce by laying people off or instituting mandatory furloughs. Companies and individuals are filing for bankruptcy on a daily basis all across the country. Unfortunately, the legal profession is not exempt from this recession; in fact, quite the opposite is true. Large law firms have instituted programs whereby they are deferring the hiring of new associates for at least one year in an effort to cut costs. Law firms have endured massive reductions, specifically the attorney workforce. In a 2010 article on <www.law.com> titled, “Revenue and Profits Fall at Mayer Brown,” the revelation that in April 2009 the firm laid off 45 attorneys and 90 staff in the United States in response to the economic downturn was shocking. Additionally, the overall attorney head count to date at Mayer Brown is down by 144 with most of that number, 96 attorneys, coming from the firm’s U.S. offices. Mayer Brown saw a dramatic decrease in profits in 2008 when its net income fell by 19 percent. According to Crain’s Chicago Business February 15, 2010 issue, the number of attorneys who lost their jobs nationwide in 2008 was cited at approximately 5000 compared with less than 1,000 in 2008. Moreover, revenue at 50 of the 100 largest law firms fell 4 percent last year, following a 7 percent rise in 2008 and an average gain of 12 percent during each of the previous seven years, according to Citi Private Bank, a unit of Citigroup Inc. in New York.
Law firms have also reduced their hourly rates in an effort to retain clients who are unable to pay last year’s high hourly rates. In a recent Chicago Tribune article, Natalie Spears, a litigation partner at Sonnenschein Nath & Rosenthal was quoted as saying, “Clients are challenging their law firms to take a fresh look at the legal service model in order to deliver greater value.” Spears headed the Sonnenschein committee that revamped associate pay in 2008, basing that process on core concepts of business development. Spears was also interviewed for the Crain’s article and she did not believe this change in hourly rates was temporary or that any assumptions could be made about when or if firms would return to pre-2008 billable practices. According to Spears, “At the end of the day, it’s how corporate America has been doing business for a long time. And law firms are now taking a page out of that book.”
Obviously, the recession has made a significant impact on the ways in which lawyers bill their clients. One of the most notable changes to the traditional business model in the legal profession is the sharp increase in flat fee contracts or “value billing” as opposed to the traditional hourly fee model. Flat fee contracts were once used primarily for specific legal matters such as a Standard Lease, Simple Marital Agreement or Simple Will, just to name a few. However, the considerable increase in this alternative billing arrangement was borne out of the combination of a shrinking corporate legal budget as well as clients demanding greater value for legal services and more certainty about their legal billing. A flat fee arrangement is a wonderful tool that can be used to control a firm’s budget and limit the amount of time spent reviewing invoices or creating fee petitions. These tough economic times have forced law firms to restructure their business practices or face reduced profitability. Thomas Fitzgerald, Managing Partner at Winston & Strawn LLP, Chicago’s 4th largest law firm, noted that he expects alternative billing practices, including monthly retainers and flat fee arrangements, to approach 20 percent of assignments this year, according to the Crain’s article.
The economic downturn is creating more demanding clients, and in turn, pushing forward thinking law firms to re-think the way they do business. A client expects to pay a fee that corresponds, at least somewhat, to the amount of time spent by the attorney. Unfortunately, one of the problems with the billable hours system is that it makes no distinction between the hour spent on trivial activities and the hour spent on substantive matters. Further, it affords the opportunity for the worst kinds of excess, such as padding hours, thereby increasing revenue without supplying value. The days of lofty hourly rates and automatic raises at large law firms appear to be over as clients are looking for certainty in fees and placing efficiency at a premium; hence, the sharp increase in flat fee arrangements.
How else are Alternative Billing Practices being implemented?
One way the change in billing practice is being felt in the City of Chicago’s Law Department is the relatively new procedure of sending cases out to private attorneys for a flat fee, as opposed to an hourly rate, in order to reduce the cost of defending the case. Additionally, that flat fee arrangement is sometimes contingent on the private attorney seeing the case through to trial. According to Law Department spokesperson, Jennifer Hoyle, who has been quoted in the Chicago Tribune recently, there has been a significant increase recently in the number of “small-value lawsuits,” defined as under $100,000, being filed against the Chicago Police Department. Upon a directive by Jody Weis, Chicago Police Department Superintendant, the Law Department was directed to litigate those cases, in an attempt to deter additional meritless lawsuits against the Police Department. In other words, if plaintiffs know that their complaint will in fact be litigated, they will be more concerned with the factual validity of the complaints filed. As a result, Hoyle stated that the City Law Department is invoking even more flat fee arrangements in order to cut costs as well as ensure that cases are not quickly settled but in the alternative, vigorously defended. It is an attempt by the City to continue farming out cases when necessary but, at the same time, save money because the billing practice is “value-billing” in the form of a flat fee contract.
In 2010, the Office of the Cook County State’s Attorney created an internal Conflicts Counsel Unit to handle any litigation involving potential conflicts with the State’s Attorney’s Office. The past practice was to send the aforementioned cases out to outside counsel due to antagonistic defenses between a Cook County entity and an individual. However, with the deficit in the County Budget increasing, the Office created this Conflicts Counsel Unit in order to save money by reducing the need for outside counsel when such conflicts arise. This cost cutting measure could potentially save the County millions, which was paid for cases sent to outside counsel in prior years.
It is well-known that taxpayers are routinely paying attorney fees for private firm litigation against government entities. Notwithstanding, it is also known that the lofty hourly rates of private attorneys can be difficult to fight. Just this month, U.S. District Court Judge Wayne R. Andersen reduced the fee request of several Chicago law firms in the Shakman litigation involving the City of Chicago. In a unique twist, Judge Andersen’s ruling noted that this litigation involves “public service work, and the city has faced substantial budget problems since 2008.” Judge Andersen reduced plaintiffs’ counsels’ fees from $600 hourly to $400 and from $491 hourly to $350 per hour which was significant given the fact that plaintiffs’ counsels have argued successfully for their current hourly rates for years in this decades-long litigation. Interestingly, Jennifer Hoyle stated that the City was not satisfied with Judge Andersen’s ruling which denied plaintiffs’ counsels approximately $100,000 in fees and she indicated a possible appeal of that decision.
In short, times are changing and attorneys are being forced to change with them in order to stay viable. The shift in billing practices will affect all attorneys from private lawyers to attorneys representing governments, regardless of whether they are in house or paid outside counsel. ■
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